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ANZ New Zealand, the local unit of Australia & New Zealand Banking Group, boosted first-quarter earnings 18 per cent, benefiting from cost-cutting and smaller hedging losses, even as its loan book shrank and it faced skinnier margins.

Cash profit, the favoured earnings measure for banks that strips out non-core items, rose to $459 million in the three months ended December 31 from $390m a year earlier, the Auckland-based company said in a statement. Net profit gained 16 per cent to $403m.

Net interest income rose just 3 per cent to $773m as the lender's margins were squeezed due to higher funding costs and greater demand for less profitable fixed rate mortgages. However, other income was up 46 per cent to $266m, which included a smaller loss in the fair value of the bank's hedging activities, recorded at $11m compared with $45m in the same period last year. Operating costs fell 3 per cent to $364m as the bank clamped down on spending.

ANZ's New Zealand branch saw net loans shrink to $119.17 billion at December 31 from $120.65b at the end of September, though still up from the $115.73b a year earlier. Customer deposits rose to $94.34b from $91.36b three months earlier and $88.19b at the end of 2015.

"Net interest margin has contracted due to increased funding costs and demand for fixed rate home lending," the bank said in a statement. "The increase in other operating income reflected higher global markets trading income and valuation gains on derivatives."

New Zealand's main banks collectively saw a decline in profits in 2016 due to shrinking margins, largely because they had to turn to international wholesale funding lines to back the rapid pace of credit expansion. KPMG's latest financial institutions performance survey, published this morning, found banks anticipated a reduction in lending this year due to increased use of wholesale funding and the prospect of the big four Australian-owned banks having to send billions of dollars back to their parents to ensure they meet new capital adequacy requirements across the Tasman.

ANZ New Zealand's impairment charges for bad loans rose to $37m in the quarter from $27m a year earlier, which it said reflected a "normalising" of provisioning levels across its portfolio.

The bank's retail division delivered a 13 per cent gain in profit to $256m on a 5.7 per cent gain in external revenue to $737m. Its institutional business, which provides financial services, more than doubled profit to $99m on a 90 per cent revenue gain to $173m.

The commercial unit, which services commercial and agricultural customers, posted a 7.5 per cent decline in profit to $99m on a 7.1 per cent fall in revenue to $456m. The commercial division includes UDC Finance customers, which ANZ has since agreed to sell to China's HNA Group.

ANZ's group net profit was up 8 per cent to A$1.6b and cash profit rose 31 per cent to A$2b, which it put down to "a good performance in Australia and New Zealand retail and institutional along with a lower provision charge and the sale of 100 Queen St", referring to its former Melbourne headquarters.

Dual-listed ANZ fell 1.1 per cent to $32.06 on the NZX, having gained 38 per cent over the past 12 months.